Changes to Tax Brackets May Increase Take-Home Pay

The Internal Revenue Service (IRS) recently announced adjustments to all seven federal tax brackets for tax year 2023.

The adjustments will raise the top amounts of each bracket and could lead to an increase in take-home pay for employees who make no changes as their earnings would be taxed at lower rates.

The Social Security Administration also reported the maximum earnings subject to the Social Security payroll tax will go up nearly 9 percent from 2022 threshold. Because of this, some high earners may not see as large of an increase in take-home pay because more of their income would be subject to Social Security payroll taxes.

Additionally, the IRS revealed the largest automatic adjustment to the standard deduction since 1985. A standard deduction can be claimed when filing a tax return to reduce an employee's taxable income, and in turn reduce the amount of taxes they owe. This also ensures that only households above a certain income threshold will owe any income taxes.

Employees can visit the online IRS Tax Withholding Estimator to determine the appropriate amount of income to withhold for federal income tax purposes. This tool also helps employees with additional sources of income determine the appropriate amount of withholdings to boost take-home pay and avoid a tax bill when they file their tax return.

HR Response

HR departments should encourage employees to revisit their paycheck withholding amounts before the end of 2022 and update their IRS Form W-4 if desired. Other decisions that may be affected could include how much salary an employee would defer into a traditional 401(k) plan or health savings account (HSA). Contributions to these types of plans reduce taxable income by the amount contributed and could be used to keep income from passing into a higher tax bracket.

For more information on the topic, check out the SHRM article 2023 Tax Bracket Changes Could Increase Workers’ Take-Home Pay and on the IRS webpage Adjust Tax Withholding Now to Pay the Proper Amount of Tax.